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Federal Tax Incentives for Architects, Engineers and
Design-Build Contractors
June 5, 2013
Presented by
John Armour, CPA, CCIFP
Managing Director, CBIZ MHM, LLC
Robert Gellman, CPA
Managing Director, CBIZ MHM, LLC National Tax Office
Michael Silvio, CPA
Managing Director, CBIZ MHM, LLC

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Circular 230 Notice
Any tax advice contained in this program is not intended to
be used and cannot be used for the purposes of avoiding
any penalties that may be imposed by the Internal Revenue
Code.

Agenda
• § 179D-Energy Efficient Building Deduction
• § 199-Domestic Production Activities Deduction
• § 41-Research and Development Tax Credit
• Summary/Key Takeaways
• Q&A

Robert C. Gellman, CPA
Mr. Gellman is a Managing Director of CBIZ MHM, LLC and a Shareholder of Mayer Hoffman
McCann P.C. With more than 25 years of tax and financial advisory experience, Mr. Gellman helps
a broad range of privately held clients and high net worth individuals to develop tax and financial
strategies consistent with their financial goals. Mr. Gellman has authored a book and workshop on
the subject entitled: Seven Keys to Unlocking the Door to Your Dreams: Exit Strategies For
Business Owners. As a reflection of his broad interests and capabilities, Mr. Gellman is also leads
the San Diego and Orange County Not-for-Profit and Code Section 179D Energy Efficient Design
Deduction Study tax practice areas.
Mr. Gellman uses his experience in the estate planning and charitable giving areas to address the
personal and philanthropic interests of his individual and business owner clients. He specializes in
exit strategy and succession planning, longer term tax and financial strategies, personal
CFO/trusted advisor services and not-for-profit organization taxation and governance. His specific
area of expertise, and his passion, hones in on the long-term planning needs of privately held
business owners form a myriad of industries.
Mr. Gellman has a Masters Degree in Taxation from San Diego State University, Bachelor Degrees
in Accounting and Finance from the University of Southern California and the Certificate in
International Business from the University of San Diego. He is a member of the firm’s Individual
Wealth Planning and Not-For-Profit Technical Committees. Mr. Gellman serves on the Advisory
Boards of client companies, and on the board of directors of the San Diego chapter of the USC
Marshall School of Business, the USC Trojan Club of San Diego and the World Trade Center San
Diego. Mr. Gellman is an active member of the Corporate Directors Forum, Business Executives
Council and Estate Planning Council of San Diego.

John R. Armour, CPA CCIFP
Having practiced for more than 30 years with specialization in the construction and real estate industry, John
Armour is nationally recognized as leading authority and expert in construction accounting and taxation. John
is licensed to practice as a CPA in Colorado & New Mexico and is a Managing Director in CBIZ MHM, LLC
(CBIZ) where he serves as its western region national AEC industry services director.
Serving as chair of the Current Tax Issues sub-committee of the Tax and Fiscal Affairs Committee of the
Associated General Contractors of America, John is responsible for leadership of tax agenda initiatives for the
construction industry on a national level including legislative revisions to tax code and working with the IRS
and Treasury on regulatory improvements. He also has been highly involved with accounting standards
projects such as revenue recognition working directly with the FASB / IASB staff and board members.
John is a frequent speaker to construction trade associations and conferences. He served as chair of the
AICPA National Construction Industry Conference planning committee from 2002 - 2005, the largest annual
educational opportunity for CPAs serving the construction industry in public and private capacities. He is an
author and instructor of three construction industry continuing education classes that have been presented in
over 40 states. John also is on the editorial board of the Journal of Construction Accounting and Taxation.
He is active in construction trade associations including being a founding member of the Colorado Chapter of
the Construction Financial Management Association. John has served on various committees and advisory
capacities and presently serves on the legislative committees of both the Colorado Contractors Association
and Associated General Contractors Colorado Chapter. Additional construction industry involvement includes
the Associated Building Contractors, Professionals for Colorado Contractors Council, and Rocky Mountain
Surety Association.

Michael Silvio, CPA
Michael Silvio is Managing Director with CBIZ MHM, LLC. He leads the firm’s National Federal
Credits and Incentives Practice and is located in Irvine, California. His focus is on federal incentives
such as the Research & Development (R&D) Tax Credit, the Domestic Production Deduction-Sec.
199, Energy Incentives and the like.
Michael has more than 22 years of experience in public accounting and tax and has served a variety
of businesses in the manufacturing, construction, professional service and not-for-profit industries.
Michael’s primary focus is in tax credits and tax incentives areas. He has conducted over 350
research credit studies along with many Sec. 199 studies for numerous companies in various
industries. He has served as a representative before the IRS and state taxing authorities to support
and defend numerous research credit claims for taxpayers.
He also has experience in financial accounting, reporting and management, auditing, and individual
and business income tax. Michael has supervised compilations, audits and reviews for various
clients, including small and medium sized businesses, in addition to providing income tax planning,
consulting and compilation services.
Michael is a CPA certified in California. He is a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants. He has a Bachelor of Arts in
business administration with an emphasis in accounting from California State Polytechnic University
in Pomona. Throughout his career he has authored several publications and conducted numerous
presentations on current tax legislation, R&D tax credit, energy incentive issues and other tax related
business incentives. He has also spoken to organizations such as the California Society of CPA’s, the
National Association of Manufacturers, the R&D Credit Coalition in Washington, D.C., and the
American Bar Association.

§179D Energy Efficient
Commercial Building Design

Primary IRS Guidance
• Internal Revenue Code §179D
• Treasury Regulations have not been issued
• Other IRS Technical Guidance
• Notice 2006-52
• Notice 2008-40
• Rev Proc 2011-14
• Notice 2012-26
General Rules, Partial Deductions,
Specified Energy Saving Percentages
Rules Covering Government and
Public Buildings, Alternative Energy
Saving Percentages
Changes in the Method of Accounting
for Building Assets
Additional Energy Saving Percentages

Other Areas of Guidance
• Engineer’s Technical Requirements
• National and In-State Licensing Standards
• Approved Performance Rating Methodology
• Energy Efficiency Rating Standards
• Reference Building Standards
• Prescribed Modeling Software
• Field Inspections
• Report Standards

Summary Of Energy Saving Percentages
179D Rules
Permanent/Fully
Qualifying Property
Permanent/Fully Qualifying Property
Interim/Partially
Qualifying Property
(Lighting Only)
IRS Notice
2006-52, 2008-40, 2012-
26 2006-52 2008-40 2012-26
2006-52, 2008-40 and
2012-26
Requirement
Percent reduction in energy cost
Percent reduction in lighting
power density
Building Envelope 50% 16 2/3% 10% 10% N/A
HVAC 50% 16 2/3% 20% 15% N/A
Interior Lighting 50% 16 2/3% 20% 25%
Generally 25% (50% for
warehouses)
Effective For
Property Placed In
Service
Jan 1, 2006- through
Dec 31, 2013
Jan 1, 2006 through
Dec 31, 2008
Jan. 1, 2006 through
Dec. 31, 2013
Feb. 24, 2012
through
Dec. 31, 2013
Jan. 1, 2006 through
Dec. 31, 2013

Deductions Available If Energy Efficiencies
Have Been Met
• Lighting - $.60 per square foot
– Adjusted under certain circumstances
• HVAC - $.60 per square foot
• Building Envelope - $.60 per square foot
• Limited to Cost Incurred
• Example: 100,000 Affected Sq. Ft. X $1.80 = $180,000 Deduction

For Commercial Buildings
• Available to Owners of Commercial Buildings and Parking
Garages for Assets Placed in Service After 1/1/2006
• Deductions Are Applicable to the Year in Which the Property is
Placed In Service
• Depreciation Methods Adopted in Prior Years Subject to
Change Within Current Year Tax Returns
• 179D and Cost Segregation
– Lighting and HVAC systems that do not qualify for cost segregation
may qualify for 179D

Special Rule for Government-Owned Buildings
Buildings
• Property Owned by a Federal, State, or Local
Government or Political Subdivision
• Allocable to the Person Primarily Responsible for
Designing the Property
• During the Year in Which the Property is Placed In
Service
• May Require a Signed Acknowledgement Form Which
May Allocate the Deduction at the Owner’s Discretion

Certification & Documentation
• In-State Licensed Engineer
• Obtains Design Plans and Specifications
• Applies Performance Rating Methodology
• Performs Field Inspection as Prescribed
• Provides Data Summary and Model Output
• After the Property Is Placed In Service
• Provides A Statement That the Study Has Been
Conducted Pursuant to Prescribed Guidelines

Claiming the §179D Deduction
• Confirmation Of Procedural Compliance with All Areas of
Technical Guidance
• Validation of Reporting Period
• Compilation of All Audit Support File Documentation
• Validation of State Deductibility
• For Commercial Building Owners - Filing For a Change in
Method of Accounting for Building Assets within Current Year
Returns
• For Primary Design Contractors of Government Owned
Buildings - Filing of Amended and Current Year Returns

§199 Domestic Production
Activities Deduction (DPAD)

§199 Overview – Tax Benefit
• Deduction equal to the smallest of:
– 9% of taxable income
– 9% of qualified production activities income (QPAI)
– 50% of W-2 wages allocable to domestic production gross
receipts (DPGR)
• Qualifying activity
– Construction performed in the United States
– Engineering or Architectural services performed in the united
states

Taxable Income Limitation
• Taxable income without regard to §199 deduction
• §199 deduction cannot create or increase an NOL
– NOL carryback/carryover under §172 regs computed without
regard to §199 deduction
– Exception for deduction allocated to non-consolidated
member of a §199 Expanded Affiliated Group (EAG)
Note – If your state income tax is based upon Federal taxable income the
deduction will result in both Federal and State tax savings

QPAI Determination
• Determine Domestic Production Gross Receipts
(DPGR)
• Less Cost of Goods Sold allocable to DPGR
• Less Other Expenses directly allocable to DPGR
• Less Indirect Expenses (remaining G&A) apportioned
to DPGR

Qualifying Activities – Engineering and
Architectural Services
• Required to be in an engineering and architectural
trade or business on a regular and ongoing basis
– Not required to be primary or only trade or business
– Must be engineering and architectural under NAICS code
• Services must be performed in the U.S. for U.S.
construction projects
• Project need not be undertaken or completed
• De minimis rules

Qualifying Activities – Engineering and
Architectural Services
• Qualifying services
– Engineering includes
• Any professional services requiring engineering education,
training and experience
• Responsible supervision of construction to assure compliance
with plans, specifications, and design
– Architectural includes
• Any professional services
– Consultation, planning aesthetics and structural design.
– Administrative support services
Note – Services such as entitlement services do not qualify.

Qualifying Activities – Construction
• Construction performed in the U.S. with respect to real property
– Required to be in a construction trade or business on a regular and
ongoing basis
• Not required to be primary or only trade or business
• Must be construction under NAICS code
– Item is the construction project
– Proceeds from sale of land are excluded
• Land safe harbor provided
• Grading, demolition, clearing, excavation and other activities may be
construction
– Make reasonable inquiry or reasonable determination
– DPGR includes construction warranties

What is Real Property?
• Buildings (including structural components of such
buildings)
• Inherently permanent structures other than
machinery
• Inherently permanent land improvements
• Oil and gas wells, and infrastructure
• IDC

What is Real Property ?
• Structural components of buildings and inherently
permanent structures include property such as walls,
partitions, doors, wiring, plumbing, central air
conditioning and heating systems, pipes and ducts,
elevators and escalators, and other similar property.
• Infrastructure includes roads, power lines, water
systems, railroad spurs, communication facilities,
sewers, sidewalks, cable, and wiring.
• Term also includes inherently permanent oil and gas
platforms

Qualifying Activities – Construction
• Real Property not Personal Property
• Substantial Renovation vs. Repair
• U.S. Project
• Other Issues
– Tangential services performed independently
– Land improvements

Qualifying Activities – Construction
• “Substantial renovation” means the renovation of a
major component or substantial structural part of real
property that
– Materially increases the value of the property
– Substantially prolongs the useful life of the property, or
– Adapts the property to a new or different use

Gibson and Associates, Inc. v. Commissioner
136 T.C. No 10 February 24, 2011
• Best Practices learned from Gibson
– Avoid terms in documentation that are typical of repairs and
maintenance regulations
• Use surface restoration vs. painting
– Define the “Item”
– Where possible, modify the owner contract or PO so that the
owner attests that they are capitalizing the cost of the project
– Understand IRC 263(a) – Court overturned the government
position that they could rely solely on section 199 Code and
Regulations

Gibson and Associates, Inc. v. Commissioner
136 T.C. No 10 February 24, 2011
• Best Practices learned from Gibson
– Federal Highway Act – 23 US C Section 116 – Federal funds
are a cost effective way of extending the useful life of a
project
– Gibson ruled that a 3-year life extension or 5% of FMV
increase resulted in capitalization treatment
– Other criteria for qualification
• Adapt to new use
• Part of new construction
– Subcontractors can include the work of others
– Use the “Gibson Spreadsheet”

§ 41Research and Development
Tax Credit

The Federal Research Credit : Technical Aspects
Governed by IRC Sections 41 and 174
• Federal credit is 20% of qualified costs over baseline for
activities performed with U.S.
•Various states have various credit provision for R & D
performed within the state
Methods of calculation:
•Traditional Method
•Alternative Simplified Credit (Fed only)
Reduced credit can be elected (IRC 280C)
• Fed: Can be carried back 1 year and carried forward 20
years; for 2010, carry back is 5 years as ESB credit
• Carry back and carry forward provision vary by state

The Research and Development Tax Credit
• The Four Part Test (See next slide)
• The Section 174 Test (IRC 174)
– In Connection with a Trade or Business
– Discover information to Eliminate Uncertainty-Experimental in
Nature

What Qualifies as Research? – The Four Part Test
Permitted Purposes
The activity must relate to a new or improved
business component’s:
• Function ▪ Performance
• Reliability ▪ Quality
“Business component” = product or process
Technological in Nature
The activity performed must fundamentally
rely on principles of:
• Physical science
• Biological science
• Computer science
• Engineering
Elimination of Uncertainty
The activity must be intended to discover
information to eliminate uncertainty concerning
the capability or method for developing or
improving a product or process, or the
appropriateness of the product design.
Process of Experimentation
Substantially all (80%) of the activities must be
elements of a process of experimentation
involving:
• Evaluation of alternatives
• Confirmation of hypotheses through trial & error,
testing and or modeling
• Refining or discarding of the hypotheses

Research and Development Tax Credit:
Qualified Costs Included
‣ Wages, excluding any fringe benefits, of employees directly
engaged in the research, or that provide direct supervision
or support of the research. This amount can be found on
line 1 of the form W-2.
‣ Supplies, excluding land and depreciable property. These
supplies must be consumed in the performance of the
research activities. Certain overhead costs can be included
such as rent and utilities and telephone expenses.
‣ Outside services incurred during the research process.
Only 65% of these costs are eligible for the credit. These
costs include outside consultants, software programmers
and engineers, outside tool and die makers, etc.

R & D Credit Scope Limitations
To take the credit, it must not be “funded;” This involves two concepts:
‣ The business must be at risk on its investment in the research and
‣ The business must retain substantial rights in the results of the research
‣ See Field Attorney Advice (FAA) 20121401F

R & D Credit: Industry Opportunities-
Architectural and Engineering
• Design and Build or Engineering Procedures
• Design issues
– Unique project requirements
– Site issues
– Environmental issues
– Codes associated with structure and energy
• Integration of all subcomponents (HVAC systems,
materials, designs)
• Trinity case

Trinity Industries, Inc. v. United States, 691
F.Supp.2d 688 (January 29, 2010)
‣Court concluded shipbuilder’s business components were
the entire prototype ships rather than the subcomponents
of these ships.
‣Court alleviated having to qualify each subcomponent
activity and allowed the easier total development expense
cost.
‣Court ruled that custom orders from clients qualified as
business components.

R & D Sample Activities for the Construction Industry
‣ New and improved design efforts related to energy efficiency
goals
‣ Design efforts associated with overcoming challenges
associated with specific site plans
‣ Use of new or unique materials in the construction effort
‣ Means and Methods Engineering
‣ Developing alternative designs for plumbing systems,
electrical systems, heating and cooling systems, and lighting
systems.
‣ Designing alternative structural designs for a new or
improved construction effort
‣ New or improved design efforts to overcome technical
challenges due to space issues and/or environmental issues

Previous Tier I Internal Revenue Service Issue
• In 2006, IRS initiated Tier Issues Process to ensure
consistency and uniformity in certain types of audits they
deemed as high risk
• R&D Credits used to be a Tier I issue with the Large
Business and International (LB&I) Division of the IRS
• IRS said there would be more audits with a higher level of
scrutiny
• Agents must adhere to following guidelines now:
– IRS Industry Directives and Guidelines
– R&D Audit Technique Guide (Released May 30, 2008)
– Notice 2002-44
– Use of R&D Technical Advisors

Post Tier I Internal Revenue Service Issues
• As of August 17, 2012 Tiered Issue Process to set exam
priorities has been terminated. –LB&I-4-0812-010
• New process is more decentralized
• Provides more authority to agents and teams to craft
taxpayer-specific approaches to issues
• Specialize practice groups for domestic and international
issues
• Balance of consistency with no “one size fits all” approach
• Better results for taxpayers as agents have authority to be
reasonable in their audit of all issues (including R & D
credits)
• “Vice grip of coordination has been released”-CPAs say
• Issues that were tiered should be risk-assessed and
examined in the same manner as any other issue
• Specialized practice groups do not have any authority over
the examining agents

Potential remedies to document and substantiate credits taken:
• Establish Procedures and Tools for Capturing and Maximizing Future Credits
• Revisit Fixed Base Percentage determination
• Have researchers/client personnel spend time documenting how they arrived at the R&D
percentage qualifications used in determining the qualified research expenses
• Break out time into appropriate categories—by person.
•Attempt to identify the largest projects that individual cost centers
work on. Try to support this determination with work plans, payroll
records, etc.
•Reliance on the recollection of a department head should be
your last resort.
•For documentation, use material originally prepared for non-tax
reasons, if you can. Engineers are often “pack rats.” You might be
surprised at the type of details that they retain.

Proper Record Keeping
• The ideal methodology to support proper record keeping
is:
Contemporaneous
Documentation

Summary/Key Takeaways
• § 179D
179D for the primary designer of government owned buildings is available for all open tax years.
179D for owners of commercial buildings is available for buildings placed in service after 1//1/06.
179D deductions are available for taxpayers who have conducted a qualifying study.
• § 199
Develop an internal system to identify qualifying projects on a concurrent basis to maximize the
deduction
Review prior years filings for possible amendments
Add contract/PO review procedure to confirm owner capitalization of project costs
• § 41
If you are performing activities in designing and engineering unique, energy efficient structures you
should be considering the research and development credit.
You should look back at activities performed during the three prior tax years to determine if you
have an opportunity to obtain research credits for these activities.
If you are performing qualifying activities and taking the research credit, are you properly
documenting and retaining supporting information?

QUESTIONS?

Upcoming Webinars – Save the Date
Eye on Washington: Quarterly Business Tax Update (2 nd Quarter) on
Wednesday, July 17 th from 2:00 – 3:00 ET
Exit Strategies for Contractors on Wednesday, July 31 st from 2:00 – 3:00 ET
California as a Backdrop for recent State Tax Developments on Wednesday,
August 21 st from 2:00 – 3:00 ET
Revenue Recognition for the Architecture/Engineering/Construction Industry
on Thursday, September 12 th from 12:00 – 2:00 ET
Also, stay tuned for more industry specific webinars! Registration will be
available closer to webinar date.

Additional Resource
Keep up with A/E/C industry developments at our
blog:
constructionacctgblog.cbizmhm.com

CBIZ MHM, LLC Contact Information
John Armour
Managing Director
720.200.7081
Robert Gellman
Managing Director
858.795.2110
Michael Silvio
Managing Director
949.727.1322
jarmour@cbiz.com
bgellman@cbiz.com
msilvio@cbiz.com

Thank You